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Tuesday 11th July 2023
Pay Growth Adds to Pressure for Interest Rate Rise ...
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| | Hi Friend,
Average pay rose by 7.4 per cent in May,
according to labour market data released by the Office for National
Statistics today. The month data was down from 7.8 per cent in April.
The three month average rate moved higher to 6.9% up from 6.7%. Labour Stats are great .. there is just so much data to pick and choose. Thirty three pages packed with goodies for doves and hawks alike.
Doves
will note, unemployment increased by 65,000 to 1.370 million. The
unemployment rate increased to 4.0%. Employment dropped, redundancies
increased and vacancies fell. The monetary medicine appears to be
working albeit slowly.
The hawks will focus on the earnings data.
Average pay rose by 7.4 per cent. Private sector pay increased by 7.7%.
Service sector pay increased by 7.6%. Funds for fat cats in the
financial sector increased by 9.2%.
Public sector pay was up by
5.8%. Construction pay was restricted to 4%. No wonder vacancies are
increasing in retail. The rate of pay gain for retail workers was less
than 4%.
Where Are Rates Headed? Bet on Higher for Longer —Here
and Everywhere … Prices and labour costs are weighing on central bankers
despite fears of instability in the U.S. regional banking sector and
the prospects of recession in Europe and the U.K.
Andrew Bailey
has warned that interest rates will continue to rise. Both the
Chancellor and the Governor have urged pay restraint. The Bank of
England may raise rates by as much as 50 basis points when the monetary
policy committee meets early next month. Real wage cuts for workers, no
return to the Gold Standard but the pound has risen sharply since the
release of the data trading at $1.2923 as we write.
Capital
Economics suggest “Our forecast is for the Bank to raise interest rates
by 25 basis points in August … but we can’t rule out another 50 basis
points hike. Much will depend on June’s CPI inflation data.”
"In
the latest update Bloomberg economists expect the Bank of England will
push the UK into recession by the end of the year. A year-long recession
will hit Britain in the final three months of the year assuming the
Bank of England raises interest rates to 5.75% by November.
JP
Morgan said its central forecast was for rates to peak at a lower level
of 5.75% by November, but warned rates could go higher, possibly to 7%
under “some scenarios”. "The Bank of England could be forced to push
interest rates as high as 7 per cent and “raise the odds” of a recession
to bring down inflation." said Allan Monks, economist.
Three
month gilts trade at 5.4%. Six months gilts trade at 5.8%. For the
moment we are adjusting our base rate peak this year to 5.5% on the
basis of two 25 basis point hikes in August and September but Bloomberg may be right. Bloomberg
forecasts rates at 5.75% by the end of the year. JP Morgan thinks rates
could hit 7%. Markets are pricing in at least another 125 basis points
to reach 6.25%. It all seems a bit of a stretch.
So what of the medium term? We model 4.50% as the long run base rate in life after Planet ZIRP ...
In
the UK, prior to the Great Financial Crash [2000 - 2008] the average
inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year
bond yields averaged 4.50%. Ten year gilts currently trade at 4.64%. 30
year gilts trade at 4.68.
No return to the era of zero rates. No
return to Planet ZIRP. No return to the "Forbidden Planet". Where Are
Rates Headed? Bet on Higher for Longer —Here and Everywhere. Follow our
weekly updates with our Saturday Economist Friday Forward Guidance.
Want to know more ...
Stay
up to date with our Friday Forward Guidance Features on Rates and our
Monday Morning Markets updates on equities, bond yields, exchange rates,
and commodity prices. Available on The Saturday Economist web site.
To understand the markets, you have to understand the economics … and we do.
Have a great week,
John
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| | “Whenever the Fed hits the brakes,
someone goes through the windshield. You just never know who it’s going
to be.” No we know ...
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| Our Latest Case Study : Silicon Valley Bank : The Bank from Planet ZIRP ...
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| | To understand the markets, you have to understand the economics ... and we do
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© 2023 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
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